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CAD: CPI hits BoC target, but unlikely to last - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 22, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    James Smith, Economist at ING, notes that the Canadian consumer prices grew at their fastest annual rate in over a year during January, but very weak retail sales data will be a concern for the Bank of Canada.

    Key Quotes

    “January’s CPI data beat expectations, with both the core and headline measures of inflation coming in at 2%, hitting the Bank of Canada’s target for the first time since 2014. However, this is predominantly thanks to base effects in the food and transportation components and should move back down towards the 1.5% mark next month. That said, there was a seasonal element at play too, with noticeable increases in the prices of fresh produce, given increased winter imports.

    It is also likely that the effect of CAD depreciation over the past year has helped push up prices. That said, this effect is transitory and the Bank of Canada has stated that the “disinflationary effects of economic slack” and “lower consumer energy prices” will mean that it will not consistently hit its inflation target until early 2017.

    Although the Bank of Canada kept rates on hold last month, the continued fall in commodity prices, weak business investment and rising unemployment suggest that the economy is struggling. This was emphasised by December’s retail sales data, which came in much lower than consensus at -2.2% MoM, adds further downside risk to fourth quarter GDP due on 1 March.

    With this in mind, the main concern for BoC at the moment is not inflation, but rather non-resource exports and the effect of low oil prices on Canada’s economy. We currently forecast a 25bp policy rate cut in 2Q16, but the possibility of a move in March cannot be ruled out if 4Q15 GDP comes in weaker than expected.”
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